I have been reading Ray Dalio’s commentary since mid 2008. He’s been mediocre at best. Lot’s of big misses at highs and lows. He’s a far better businessman than investor. He has been a very profitable business. Everything else? Meh.

Yeah, he does. I give him credit for that. But I was turned off by his chicken little-esque call for the end of capitalism and markets as we know them at the beginning of 2009….the bottom. He, of course, was selling risk parity….which worked out really well for him. Investment advice? Meh.

The real tragedy of the tax plan is that it adds $1.4 Trillion of debt (if there is no recession soon) and much more debt if we do have a recession soon, to an already horrendous Federal balance sheet.

At some point the credit markets will say No Mas, U.S debt will be downgraded, and a crisis will follow.

True. We need to fix the the entitlement programs, balance the budget, and reign in much of the spending. We may have one last window to get this right before all hell breaks loose. A half a generation at best. Personally, I think as part of the fix we should do 100 year bonds and refinance the entire debt by locking in the lowest rates possible. We have one chance.

There will be a further shift in the tax burden away from the rich and onto the middle class. Since 1966, there has been a tremendous shift in the tax burdens away from the rich on onto the middle class. Corporate income tax receipts, whose incidence falls entirely on the owners of corporations, were 4% of GDP then and were 1.77% in 2016. During that same period, payroll tax rates as a percent of GDP have increased dramatically from 3.27% in 1966 to 5.95% in 2016.

One does not have to be a Keynesian to see that shifts in income to those with lower marginal propensities to consume will cause an increase in savings and a decline in consumer spending. The wealthy clearly have lower marginal propensities to consume. As I explained in a Seeking Alpha article “A Depression With Benefits: The Macro Case For mREITs”:

“…Shifting income to the rich by taxing dividends, capital gains, inheritances and corporate profits much less than the tax rates on wages also tends to make more funds available for investment since when the investment is taxed relatively less, more funds are made available for the investment. That would also put downward pressure on interest rates.

The primary change that has fundamentally changed the economy can be best described by Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), who said, “Through the tax code, there has been class warfare waged, and my class has won,” to Business Wire CEO Cathy Baron Tamraz at a luncheon in honor of the company’s 50th anniversary. “It’s been a rout.”

The forces driving inequality through the class warfare that Warren Buffett points to are cumulative. It is the compounding effect of shift away from taxes on capital income such as dividends, capital gains and inheritances each year as the rich get proverbially richer which is the prime generator of inequality.
This cumulative shift of wealth from the middle class to the very wealthy has profound impacts on the economy and securities markets. It creates a cycle where initially the wealthy pour significant amounts into investments they perceive to be safe. This can first cause an increase in economic activity. In 2005 many considered mortgage-backed securities with adjustable interest rates to be essentially risk-free. This was especially true for those rated AAA by Moody’s and S&P. This resulted in overinvestment in the real estate sector. The middle class eventually could not service the mortgage debt on their homes nor could they buy enough goods at shopping centers and department stores to generate enough funds to prevent many residential and commercial mortgages from defaulting….”https://seekingalpha.com/article/4067359

While critics of the Republican bills correctly call it war on the middle class, a more accurate critique would be to call it war on wage earners. Middle-class households that do not primarily live on wages or pensions but rather derive their income from dividends, profits or inheritances will come out ahead. Likewise, those whose very high incomes come solely from wages will do worse. It is likely that many of those who now are paid salaries will try to reorganize themselves so that their salaries are now pass-through business income, which is to be taxed at a much lower rate than wages, salaries or pensions.

As was seen in Kansas, where the rate paid by pass-through entities was reduced so that it was advantageous for those collecting salaries to reorganize themselves into pass-through entities, many highly paid individuals did so. Bill Self, the state’s highest paid employee, does not pay state income tax on millions he earns as the University’s men’s basketball coach since he uses a Limited Liability Corporation to be compensated for his services rather than a salary.

Various Republican officials have asserted that the new tax bill will put procedures in place to make sure that all personal service income such as wages, salaries or pensions will be taxed at the higher rate. This procedure would involve determining for all pass-through entities what “reasonable salaries” are for the owners of the pass-through entities. It is mind-boggling to consider how many more Internal Revenue auditors will be needed to make those “reasonable salaries” determinations for the millions of pass-through entities. So much for a simpler tax code.

Whether it is labeled a war on the middle class or a war on wage earners, it will be a mostly a massive shift of the tax burden from the wealthy and on to everyone else. Shifting the tax burden away from the rich and onto the middle class will eventually reduce economic growth. The question is how much harm will be done by the tax bill and how long it will take for the economic weakness to manifest itself. Related to this is the chance that one of the two classic risks to investors emanating from Federal Reserve action described above will occur before the eventual economic weakness manifests itself. Both of the scenarios of classic risks to the securities markets from Federal Reserve action last only until economic weakness is obvious to such an extent that the Federal Reserve changes course and reduces interest rates…”https://seekingalpha.com/article/4127862